Have you noticed more online brokers pushing option trading recently? There’s good reason. Not only are commissions higher for option trades than they are for stock trades, stock trading volume is dropping while the volume of option trades is increasing.
Online brokerages such as TD Ameritrade, Schwab, Fidelity Investments, E*Trade Financial and Scottrade are hoping to expand their businesses beyond equities and into options trading as stock trading volume sags. Options are also appealing to investors and traders alike because they are well suited for volatile market conditions plus they help hedge stock portfolios against declines.
Moreover, competition to attract and retain active traders has intensified. However and while about 21 million US households held stocks outside retirement accounts in 2009, less than 10% of these households are active traders.
On the other hand, options have been described as one analysts as a kind of crack cocaine for brokerage firms because they are easy money, can earn huge commissions and can be extremely addictive for traders.
In fact, options trading volume has risen every year since 2002 plus has risen 22% through October. On the other hand, equity trading volumes on the New York Stock Exchange has fallen 14% and 9.1% on the Nasdaq.
Meanwhile, a survey by the Options Industry Council found that option buyers averaged 31 trades a year verses 24 for other investors. Moreover, options trading usually comes with higher commissions. For example: TD Ameritrade charges $9.99 for an online stock trade while option orders can cost $9.99 plus 75ยข per contract with some clients being charged a $19.99 commission when they exercise their options.
Industry trading heavyweights are also buying smaller rivals or they are busily expanding their in-house capabilities. In fact and about two and a half years ago, TD Ameritrade, which is also the number 3 online brokerage in the US, paid about $750 million for options trader Thinkorswim in order to acquire 87,000 retail client accounts.
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